This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

Insurance Update: Is It Really a CLASS Act?

How the new government long-term care insurance program may affect your clients

Long-term care (LTC) insurance can be a tough sell to a limited market. Policies are often viewed as expensive thanks to well-publicized "average" costs, particularly as health care costs soar and companies raise premiums. Coverage is also often out of reach of buyers who wait too long and are locked out or priced out because of health and actuarial issues.

But some of that may change with a provision in the new health care reform law known as the Community Living Assistance Services and Supports (CLASS) Act. The CLASS Act, the provisions of which are still largely undefined, aims to put at least a modicum of long-term care coverage within reach of the working disabled by means of affordable premiums. People cannot be turned down because of pre-existing conditions, so even those with poor health will be able to get coverage.

Planned Obsolescence?

So does this mean that private LTC insurance is a thing of the past? Not by any means. Not only are the bugs not worked out of the system yet, even when they are, coverage will not take the place of a private policy. Daily benefits of $50 to $75 will not go far at a nursing home or assisted living facility. People will have to wait quite a while for coverage even if they sign up as soon as possible; although some provisions take effect in 2011, details on how the plan will work are not required until the final months of 2012, and most experts don't expect actual coverage to be available until 2013. And it remains to be seen whether premiums will indeed be affordable--or will stay so past the program's inception.

Employers' Choice?

Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI), says the CLASS Act is "the legislative elephant in the room." While the two defining factors--premium size and benefits offered--are still being worked out by the Department of Health and Human Services (HHS), "basically every insurance or financial professional who works with businesses of any size is going to have to become familiar with the CLASS Act, because their [business-owning] clients will be asking questions and . . . as early as 2012 will have to make some kind of decision--about offering it to their employees, or explaining why they are not offering it to them." Slome sees three critical elements for business owners: price, benefits, and administrative requirements. Of the three, he says the last is actually the most important, because currently, although discussions are still ongoing, the CLASS Act is an opt-out plan. "If you have a hundred employees or a hundred thousand, you're going to have to thoroughly educate them," says Slome. "If they have not opted out [and did not want the coverage], you will have payroll deductions and a large number of unhappy employees."

Some of the rules and regulations still to be determined are such questions as whether employees who neglected to opt out will be forced to remain in for a full year, and whether they can get their money back. While "it's just too premature to even evaluate," Slome adds, "I do believe that, because of the way the plan is supposedly going to take shape, an employer could say no [to providing CLASS Act coverage], but tell employees, 'Since we declined to participate, you're eligible to sign up on an individual basis.'"

Changing Perceptions

While approximately eight million people currently carry LTC insurance, Slome says that the potential market for it is probably around 15 million. "People wrongly assume that everyone will buy" LTC insurance, he says. But among those in the "identifiable limited market," awareness is up--where AALTCI used to get one consumer call a month inquiring about the details of coverage, he says now it receives two to three per day. Combination products, such as annuities with a LTC rider, have a "significant potential" and sales have been up--"up compared to the down years," Slome adds.

And there have been changes in how people perceive LTC coverage, which Slome attributes to four major factors. First, because premiums are so directly tied to interest rates, new policy premiums have been increasing, making coverage more expensive than it used to be. Second, this is an economy in which consumers realize that they have a limited number of discretionary dollars to spend on coverage. Third, there's a growing awareness among both consumers and agents that shorter-term policies are a more affordable option--"Something is better than nothing is not a bad philosophy," says Slome. And fourth, some insurers have stopped offering an unlimited benefit.

So people are buying coverage differently, perhaps opting for a three-year policy instead of a ten-year unlimited policy, and adding in a shared care option that can bring coverage back up to six years. They might also take advantage of a consumer price index (CPI) inflation rider or even a future purchase option, says Slome, instead of the compound inflation rider that used to be standard but "can double or even triple the base price of the policy"--and by doing so, they've dramatically reduced the cost of coverage.

Public vs. Private

Heightened awareness about LTC insurance is sure to increase once the CLASS Act gets onto everyone's radar screen--for one thing, Slome says that the government plans to sink $15 million into a consumer awareness program about it through HHS.

Not only that, but he says that this is "still the first generation of LTC policyholders, more or less." He explains, "Right now the industry pays out $6 billion [in benefits]; that impacts not just beneficiaries, but also their children [who inherit family assets that otherwise would go to pay for their parents' long-term care]. They talk to each other, and to friends and relatives and family. And when an agent has the ability to say, 'I've been selling for 15 years and don't have a lot of policies, but last year my first client started getting [benefits] and this is their story--' all that will add to building the marketplace. The agent now understands and has a story to tell, and the client relates it to real life."

While the CLASS ACT is a voluntary program, and people will have to opt out of it, it will have an effect on the market. And the market will have an affect on it in turn--because buyers of private coverage are now approaching policies with a something-is-better-than-nothing outlook, many may look more favorably on the limited options to be provided by the CLASS Act, or may choose to pay into the CLASS Act coverage and buy a less expensive private policy as well. Much will depend, too, on how many people sign up for it, and how old they are. If enough people opt in, or enough healthy people buy in to help subsidize those who cannot qualify for private insurance, coverage may be affordable; if not, premiums will rise quickly or, says Slome, "everyone will go to Medicaid."